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Economics Revision > 7.6: Different market structures > Flashcards

7.6: Different market structures Flashcards

1
Q

Define perfect competition

A

A market with a large number of small firms

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2
Q

Characteristics

A
  • many buyers and sellers in the market with perfect knowledge
  • firms are price takers
  • homogenous products
  • free exit and entry into the market
  • has any influence on the market price
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3
Q

Why are profits likely to be lower in a competitive market then a market with a few large firms?

A
  • A firm in a competitive market has a small market share, so their market power is small.
  • If firms make a profit, new firms will enter the market, due to low barriers to entry, as the market looks profitable.
  • New firms increase supply in market which lowers average price, hence, existing firms’ profits will lessen.
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4
Q

Advantages of perfectly competitive firms

A
  • In the long run, P (AR) = MC, so firms are allocatively efficient
  • Firms produce at the lowest point on AC curve, so they’re productive efficient
  • Supernormal profits earned in the short-run can make firms increase their dynamic efficiency through investment and innovation
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5
Q

Disadvantages of perfectly competitive firms

A
  • In long-run, there’s lack of dynamic efficiency as supernormal profits aren’t made
  • Pollution = lot’s of firms competing –> more production –> more consumption –> pollution in market
  • In reality, this is a theory and realistically there’s no perfect information
  • Lack of variety of good (all homogenous)
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6
Q

Define monopoly

A

A single firm dominating the market

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7
Q

Characteristics of a monopoly

A
  • a single seller
  • no close substitutes
  • high barriers to entry
  • price maker
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8
Q

State the factors that a monopoly is influenced by

A
  • barriers to entry (high BTE make it easy to obtain monopoly power)
  • number of competitors
  • advertising
  • degree of product differentiation
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9
Q

Explain barriers to entry: Economies of scale

A
  • firms grow = lower AC
  • existing large firms have cost advantage over new firms, which helps maintain their monopoly power
  • deters new firms from entering the market as they’re not able to compete with existing firms
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10
Q

Barriers to entry: Limit pricing

A

This is when existing monopoly firms set the price of their goods below the COP of new entrants to ensure they won’t enter the market profitably

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11
Q

Barriers to entry: Sunk costs

A

If unrecoverable costs are high (like advertising), this will deter new entrants into market as they’re unable to compete

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12
Q

Barriers to entry: Set-up costs

A

The cost for new entrants to enter the market is expensive, so it’s unlikely the new firm will enter the market

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13
Q

Barriers to entry: Brand loyalty

A

If consumers are loyal to one brand (the monopoly), it’s hard for new entrants to gain market share

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14
Q

The number of competitors

A

Few number of firms –> high barriers to entry –> new entrants gain less market share

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15
Q

Advertising

A

Advertising creates customer loyalty –> makes the demand price inelastic –> creates high barriers to entry for new firms

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16
Q

Degree of product differentiation

A
  • The more differentiated a product is, the easier it is to gain market share
  • More unique product is –> monopoly firm faces less competitors
17
Q

Advantages of a monopoly

A
  • Supernormal profits can be used to invest in research and development to make the firm more dynamically efficient in long run (more innovation)
  • Benefit from EOS when firm is large and AC is low. Producers benefit with supernormal profits and consumers benefit from low prices
  • Increase in international competitiveness (more capital-intensive tech, invest better quality, firm can compete internationally with making investments from supernormal profits)
18
Q

Disadvantages of a monopoly

A
  • Monopolies exploit consumers by charging them high prices. This means the good is under-consumed and consumer’s needs are not met. This allocatice inefficiency is a market failure where P (AR) > MC
  • DOS can occur when overtime monopoly firms become too big and AC rises which makes the firm difficult to manage
  • Monopolies have no incentive to become more efficient as they have few or no competitors, so COP is high
19
Q

Define natural monopoly

A

This is an industry that is most efficient where only one firm produces a good or service rather than several firms

20
Q

Evaluation for monopolies

A
  • Depends on whether market is contestable (contestable market faces threat of entry, so this creates incentive for firms to keep prices low)
  • Depends on management (large monopolies have successful management
  • Depends on government regulation (if govt threatens price discrimination, this reduces excess of some monopolies)
  • Depends on industry
  • Depends on environmental factors (a monopoly that restricts output, reduces its environmental impact as it reduces consumption)
21
Q

Define monopolistic competition

A

Many firms selling differentiated (heterogeneous) products

22
Q

Characteristics of monopolistic competition

A
  • many buyers and sellers
  • few barriers to entry and exit
  • consumers face wide variety of choice of differentiated products
    (heterogenous)
  • each firm has slight monopoly power (it controls its own brand through non-price competition)
  • price maker
23
Q

Advantages of monopolistic competition

A
  • Consumers get a wide variety of differentiated products
  • Prices are lower, output is higher than monopoly
  • High competition encourages firms to keep cost down and provide high quality products
  • Supernormal profits made in short-run can increase dynamic efficiency in firms through innovation/investment
  • Model of monopolistic competition is more realistic than perfect competition as its still an imperfectly competitive firm and buyers and sellers have imperfect information
24
Q

Disadvantages of monopolistic competition

A
  • Price is higher and output is lower than in perfect competition
  • Dynamic efficiency will be limited due to lack of supernormal profits in long run
  • Firms are not as efficient as those in a perfectly competitive market as they have x-inefficiency, which means they have little incentive to minimise costs
25
Q

Define oligopolistic markets

A

A few large firms dominate the market and they are mutually interdependent

26
Q

Characteristics of oligopolies

A
  • market dominated by few large firms
  • firms are mutually interdependent (firms must decide their market strategy to compete with close rivals)
  • high barriers to entry and exit
  • products are both differentiated and undifferentiated
  • price rigidity (prices don’t change that much/often)
27
Q

Describe what is collusion

A
  • Oligopolistic firms work together to set high prices in the market
  • Collusion leads to lower consumer surplus, higher prices, and SNP profits which allows oligopolies to act like monopolies and maximise their joint profits
  • Collusion is beneficial for firms, not consumers as prices are set high
  • Firms have strong incentive to collude as they maximise their benefits, restrict output, and cause market prices to increase which deters new entrants as it’s an anti-competitive practice
  • Collusion is more likely to happen when there are few firms, they face similar costs, high barriers to entry, and it’s not easy to be caught (as it’s illegal)
28
Q

Describe a non-collusive market

A
  • Establishes a competitive oligopoly
  • Occurs when there’s several firms
  • Occurs when firms are competing
  • Homogenous products
  • One firm has a cost advantage
  • Market is saturated
  • Firms grow by taking market share from rival firms
29
Q

Describe formal collusion

A
  • A collusion where firms formally agree to come together to collude and set high prices in the market
  • This can be cartels
  • E.g: OPEC is a cartel
30
Q

Describe tacit collusion

A
  • This is when firms make an informal agreement to come together without speaking to their rivals
  • This is done to avoid government regulators (as it’s an illegal practice)
31
Q

Describe cartels

A
  • This is where two or more firms come together and agree to control prices
  • E.g: OPEC is a famous cartel
  • Cartel’s objective is to lead to high prices for consumers and restrict output
  • Some cartels choose to divide the market up, so firms agree to not compete in each others markets
32
Q

Describe price leadership

A
  • Where one firm sets the price in the market and other firms follow
  • Usually, it’s the dominant firm in the market that sets the price
  • Firms are often forced to follow and change the price, otherwise they risk losing a significant amount of market share
  • This explains why there’s price stability in oligopolies as firms don’t want to lose market share if they don’t follow the price change
  • The price leader is the one to judge the prevailing market conditions and decide
33
Q

Describe price war

A
  • This is where firms in the market set prices way below that of their rivals
  • Rival firms also start lowering their prices and this occurs into a back and fourth price war between firms decreasing their prices
  • This is done in order to deter new entrants out of the market
  • In the short-run, firms will not be maximising profits and instead will be making a loss
34
Q

Describe non-price competition

A
  • Firms aim to increase brand loyalty which makes demand more price inelastic
  • E.g: Advertising, marketing, offering special features
  • Advertising and marketing makes firms more known to consumers which attracts them and increases demand
  • But, it’s difficult to know what the effect of increased advertising spending will be as it may be ineffective for firms who can incur large sunk costs which are unrecoverable
  • Brand loyalty –> price inelastic –> attracting and keeping firms –> higher market share
35
Q

Describe barriers to entry

A
  • Firms may have high barriers to entry in order to drive out competitors in the market and gain higher market share
  • This prevents new entrants from entering the market profitably
  • Increases producer surplus
36
Q

Advantages of oligopoly firms

A
  • Earns SNP –> invest in R&D –> yields positive externalities –> dynamically efficient in long-run –> increase in innovation
  • firms are more likely to invest when their ideas are protected –> market has high barriers to entry
  • Large oligopolies experience EOS, so their AC falls
37
Q

Disadvantages of oligopolies

A
  • Collusion results in a loss of consumer welfare as prices are set high and output is restricted, so less consumer surplus
  • Collusion reinforces monopoly power –> makes it harder for new firms to enter the market –> less competition –> decreases efficiency –> increase AC of production

Economics Revision (12 decks)

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